Time to play defense on investing
History tells us that bear markets occur nearly every four years, and corrections come every 26 months. Downturns are part of investing, but we think it’s time to play defense.
Rebalance: After years of gains, your portfolio may now be tilting excessively toward stocks. Lock in profits by selling some stocks and buying more bonds. Look for candidates to sell in the tech and financial sectors.
Buy steady Eddies: The shares of big, stable companies with steady revenues and dividends should lose less than average in a market downturn. Our top choice for exchange-traded funds that focus on such stocks is iShares Edge MSCI Minimum Volatility USA (symbol USMV, $50). Over the past three years, the fund has been 18 percent less volatile than the S&P 500, yet it has beaten the market by an average of 1.6 percentage points a year.
Own safer sectors: Consider classic defensive health-care companies, phoneservice providers and utilities. For broad exposure to health-care stocks, we like Guggenheim S&P 500 Equal Weight Health Care ETF (RYH, $175), a member of the Kiplinger ETF 20 (the list of our favorite ETFs). For utilities, we recommend Fidelity MSCI Utilities ETF (FUTY, $35); the ETF has a 3.2-percent yield and a wafer-thin 0.08 percent expense ratio. Among phone-service providers, we recommend Verizon (VZ, $49).
Hold more bonds: Treasury securities tend to fare well during periods of market turmoil. Vanguard Intermediate Term Treasury Fund (VFITX), currently yielding 1.6 percent, returned 13.3 percent in 2008, when the S&P 500 fell 37 percent. An ETF that should hold up well is iShares Core U.S. Aggregate Bond (AGG), with a mix of government and highquality corporate bonds, and a yield of 2.2 percent.
Boost cash reserves: Annual yields on the most-generous internet savings accounts run about 1.4 percent. Or consider buying Treasury bills, which are available through your broker or directly from the government at treasurydirect.gov for as little as $100. T-bills yield about 1 percent annualized.
Go international: Foreign economies are making a comeback. For broad international exposure, consider a diversified, low-cost, exchange-traded fund. Vanguard Total International Stock (VXUS, $55), a member of the Kiplinger ETF 20, tracks an index representing the entire market outside the U.S. It comes with an expense ratio of 0.11 percent.
Two mutual funds from the Kiplinger 25, the list of our favorite actively managed funds, offer a more targeted approach. Oakmark International (OAKIX) invests in bargain-priced stocks in developed Europe and Asia. Baron Emerging Markets (BEXFX) focuses on large and midsize emerging-markets companies with above-average growth potential and competitive advantages over their peers. Both funds sport five-year annualized returns that place them in the top 5 percent of similar funds.